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hi everybody..could anyone explain me differences between provisions and contingent liabilities with giving as possible as examples..thanks in advance..
IAS 37 distinguishes between:
provision – which are recognised as liabilities (provision should be recognised in FS)
contingent liabilities – which are not recognised as liabilities (should be disclosed in FS).
There’s helpful table in Course Notes (chapter 5):
If liability is more then 50% probable -> we should make provision in FS
If liability is less then 50% (but more then 5%) -> we should disclose it as a note
If liability is less then 5% – no action.From CBE:
“Prior to the financial year end of 31 July 20X9, Cannon Co has received a claim of $100,000 from a supplier for providing poor quality goods which have damaged the supplier’s plant and equipment. Cannon Co’s lawyers have stated that there is a 20% chance that Cannon will successfully defend the claim.
Which of the following is the correct accounting treatment for the claim in the financial statements for the year ended 31 July 20X9?”The probability of this liability is 80%, so we should recognise it in financial statements:
Cannon should provide for the expected cost of the claim of $100,000.@sangria9 said:
IAS 37 distinguishes between:
provision – which are recognised as liabilities (provision should be recognised in FS)
contingent liabilities – which are not recognised as liabilities (should be disclosed in FS).
There’s helpful table in Course Notes (chapter 5):
If liability is more then 50% probable -> we should make provision in FS
If liability is less then 50% (but more then 5%) -> we should disclose it as a note
If liability is less then 5% – no action.From CBE:
“Prior to the financial year end of 31 July 20X9, Cannon Co has received a claim of $100,000 from a supplier for providing poor quality goods which have damaged the supplier’s plant and equipment. Cannon Co’s lawyers have stated that there is a 20% chance that Cannon will successfully defend the claim.
Which of the following is the correct accounting treatment for the claim in the financial statements for the year ended 31 July 20X9?”The probability of this liability is 80%, so we should recognise it in financial statements:
Cannon should provide for the expected cost of the claim of $100,000.Dear can u please make it little bit clear ?
@tariqkath, what exactly?
Maybe you have some special questions?A provision is like an accrual, but where we are not certain of the amount.
A contingent liability is when it depends on something else whether or not we will actually have to pay anything (for example depends on the outcome of a court case).
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An important difference between a provision and a contingent liability is that a provision is recognised on the financial statements (ie, Dr Expense. Cr Provision) whereas a contingent liability is not recognised (ie, no financial statement element is debited or credited).
A provision could be recognised in relation to the outcome of a court case where
it is more likely than not that the reporting entity will be found guilty. If it is not. more likely than not that the reporting entity will be found guilty, then a.contingent liability is disclosed (but not recognised). If the probability of an outflow of resources is remote, then. Inothing will be done
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